Asset managers are still scratching their heads over parts of a trading regime that is central to the European Union’s new securities rulebook — with less than five months to go before it kicks in.
Investment firms are gearing up for major changes to the way they trade, courtesy of the revised Markets in Financial Instruments Directive, which aims to increase transparency and competition in Europe’s equity markets.
But with time running out before its implementation, they remain concerned about Mifid II’s so-called systematic internaliser regime, according to a report by the consultancy Tabb Group.
Mifid II rules aim to clarify the role of the market’s middle-men – investment banks and others – who stand between buyers and sellers. If these firms trade without going to a public market — if they use their own capital to buy shares from a client who wants to sell, and then hold them in hopes of finding a buyer — they are regarded as a systematic internaliser.
Under Mifid II, banks designated as SIs will be required to quote prices publicly in liquid equities and exchange traded funds up to a certain size.
Tabb has estimated there will be up to 20 SIs in equities. The consultancy found that around 75% of investment firms expect to trade with SIs from January or leave the decision to do so with their brokers.
However, a top concern among asset managers is the “lack of clarity” provided by brokers on their plans regarding the SI regime. This concern is rooted in the fact that large banks operate in different capacities. Their broker business sends orders from asset managers to different destinations to get trades done. That means the orders could be routed to the bank’s own SI, if it runs one, or to an external SI, run by another bank or electronic trading firm.
Tabb found that the buyside is unclear on how brokers plan to access external SIs, and what information from their orders will be passed on.
Mifid II will crack down on dark trading, where prices are not disclosed before trades take place, by limiting the activity that can take place in such venues, although the caps have been called into question. And banks will be forced to close their internal dark pools, known as broker-crossing networks, which allow them to avoid routing orders to exchanges, where they incur fees for trading and data.
The SI regime has been one of the most hotly-debated areas of Mifid II. The European Commission completed a consultation in July on proposed legal changes to close a perceived loophole that could have allowed SI banks and non-banks to create a quasi-exchange by linking up.
But Tim Cave, author of the Tabb report, wrote: “SIs stand to account for a significant amount of equity trading in the longer-term. They should be viewed as complementary to other sources of liquidity, helping to grow overall turnover in European equity markets.”